Memories of March distressed gold sales as equity markets plummeted overnight has likely weighed on gold fortunes.

I am always cautious about how to interpret a gold move higher on Covid-19 headlines that are arguably deflationary and, if anything, cause people to sell gold in favour of putting money under the mattress for more rainy days.

Currency markets turn risk-off

The forex market turned its toggle to “risk-off” mode over the past 24 hours with the US dollar more robust, and the high beta Australian dollar, New Zealand dollar and the Norwegian kroner all weaker.

Numerous factors can explain the change in the mood music, but the most important one is probably positioning after the surge in risk appetite over the last two weeks had perhaps moved the needle a bit too far.

With risk sentiment in the tank, USD Asia will struggle as exporter dependant and equity inflow currencies alike will fall prey to the USD safe-haven appeal. The playbook suggests investors will seek temporary shelter under the US bond markets umbrella until better clarity emerges on the US Covid-19 situation to the greenback benefit.

After putting on a strong performance earlier in the week, the Malaysian ringgit looks particularly susceptible to the toxic elixir of lower oil prices and struggling risk sentiment.

Misleading? possibly but hard to ignore the numbers

Much talk about a ‘second wave’ of the virus in the US, which is a bit misleading. It is still the first wave, which in some US states has never been brought under control.

The risk of a real second wave will be next winter, but the overnight market move is giving investors a taste of what might become the actual global market meltdown in the form of the second wave of a worldwide pandemic. And it is not pretty.

Perceptible shift pre-FOMC

There was a perceptible shift in sentiment early in the week that did foreshadow that forex traders, in particular, were becoming more mindful of any negative news, and more inclined to find the threat within breaking headlines news. Thus, the initial rise in risk appetite on the Fed’s “dot” path of unchanged rates through 2022 gave way to concerns about economic blemish.

It was the possibility of a second wave of COVID-19 cases as economies emerge from lockdown that becomes the market focus amid recent US case count data, which has undoubtedly spooked every investor on the planet.

Florida posted the highest number of new cases in a week, Texas posted its most significant daily change since the pandemic started, and Arizona also sees much higher case numbers.

However, the number of new cases in the US as a whole is decelerating, mainly because of the improvement in New York. Also, it is not clear whether this is a second wave or merely the geographic spread of the first wave.

The White House Coronavirus Task Force has yet to see any relationship between re-opening and increased cases of COVID-19, according to Food and Drug Administration Commissioner Stephen Hahn.

Are you looking to short the USD again?

If one is looking to engage shorting the dollar, although, with the rising threat of a second wave of the virus, any thoughts are probably best left until next week. But for the “brave of heart,” the less risk-sensitive currencies may start to outperform because many have substantial current account surpluses. The Fed maintained its commitment to buy everything, and the new macro bellwethers like TY, 5s30s, and gold all point to further dollar weakness.

The preferred USD short was opening up to be the Euro that was until the NY session. Still, the Euro has proved resilient despite being stretched on momentum indicators and today’s equity selloff. I think the long EURUSD will evolve from a short-term positioning/technical/catalyst driven trade to a more enduring trend.

The trade is pretty straight forward as significant asset re-allocation moves into the Eurozone, which should offer up reasonable support for the Euro over the medium term.

The US dollar becomes more burdened by the Fed’s massive balance sheet expansions, compounded by the higher possibility they may need to move the rates needle lower, shift to yield curve control or a combination of both to stabilise the US market.

FX and Gold markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp